Q&A: Global share rout

A better question would be why did it not happen sooner? Stock market investors have been unrealistically optimistic during the credit crunch in the second half of last year. Now they have woken up to the threats facing the world economy. With the US poised on the threshold of recession, and George Bush's tax cuts receiving a lukewarm reception, investors have decided to bail out.

Worries about property market prospects, demand for raw materials, consumer spending and turmoil in financial markets have knocked investor confidence across all sectors.

In the UK the ongoing woes of mortgage lender Northern Rock have added to the gloomy sentiment. Its troubles stem from gridlock in money markets - the credit crunch - which itself began with problems in the US sub-prime mortgage market - risky loans to borrowers with poor credit histories. Many of those loans have now gone bad.

The crisis deepened late last week with the first sign of problems in the monoline sector. Lenders who had previously specialised in insuring government bonds, and those for large building projects, have recently branched out into insuring a wider range of assets including sub-prime mortgages. Shares in two of the largest monoline players, Ambac Financial and MBIA, have plunged as investors feared that there may be more write-downs. Monoline may be the new sub-prime.

Why did the financial markets plunge so far yesterday?

After US stock markets failed to take any support from Bush's tax cuts on Friday, markets around the world were poised for a gloomy week. The selling kicked off in Asia and then European markets followed suit. The fall on the FTSE 100 was the steepest since on September 11, 2001.

Traders say part of the substantial fall could be down to the fact that stock markets were less liquid than usual yesterday as the US was closed for a public holiday. That meant volumes were lower and moves were more erratic. There was also a feeling that US traders were selling European shares as their own market was closed.

Another part of the steep fall is the herd mentality that sets in when markets start off deep in the red.

How will it affect me?

Whether we like it or not, most of us have a stake in the stock market. Many of our pensions are dependent on share prices. Aon Consulting says that the stock market rout led to the biggest one-day increase in pension deficits ever. The shortfall in the UK's 200 largest corporate pension schemes has now reached £42bn. An economic downturn could also see companies cutting jobs.

How long might it go on for?

Many commentators believe we are in a bear market when share prices fall by 20%. On Monday, the cumulative fall in the FTSE 100 over 14 trading days this year was nearly 14%. If the US goes into recession, the downturn could last for most of the year. Stock markets always anticipate so would usually start to recover before any recession is over. But that means at least six months of volatile, falling share prices to come.

What action might the government or Bank of England be taking?

The Bank of England is set to cut interest rates at its next meeting in February. The US Federal Reserve is promising a cut in US rates. However, the US has already made several rate cuts which seem to have had little effect. The worry is that the authorities have lost the ability to influence markets. That means there needs to be a policy surprise that no-one has thought of to have any lasting effect. This could be an attempt in the US to prop up the monoline insurers - those that insure complex bond issues, but whose businesses are rapidly deteriorating.

Is it a good time to buy?

The best time to invest is when everyone else is really glum. But it takes a lot of nerve as stocks can go down much further before they recover.

How bad is this in historical terms?

The FTSE 100 ended Monday down 323.5 points, or 5.5%, at 5,578.2. That was the biggest one-day fall in its history in points terms. It was the biggest one-day fall since September 11, 2001 in percentage terms.

The latest fall is just the 7th time in the FTSE 100's history it has lost more than 5% in a day.